Many people who wish to go into business – or who want to expand their current business dealings – choose to buy an already-formed company, rather than starting from scratch.
There are a lot of advantages to this method; but there is also a certain amount of risk involved.
– A lot of the legal and practical work has been done for you (registering the business, buying the equipment etc)
– The business should already have a solid customer base
– The business will have suppliers
– The business will have staff
– You can (hopefully!) forgo the awkward period at the start of a new business when you are working at a loss or for very little money
– The legal and practical work could have been done badly or, at least, not up to your standards
– The business may have a bad local reputation
– Local suppliers may be fed up with the business due to late payments etc
– Staff may not be suitable
– You will now be the proud owner of any debts or legal claims filed against the company!
HOW TO MINIMISE RISK
As always when it comes to business, due diligence is key. You need to ask a lot of questions – some of which you can answer yourself, but a lot of which you will have to get a professional (a lawyer or accountant) to help you with.
The first question you need to ask is, “Why is the current owner of the company selling up?”
The seller will have already given you an answer to this, but is what they said true – or the whole truth? There are some great deals to be had out there when a business owner needs to sell up due to ill health, wishing to retire or wishing to move away; but there are also a lot of businesses on the market that are being sold due to lack of demand, mismanagement or even because the owner wants to open a new premises right around the corner (see below).
Do a bit more digging. Ask around: see what the staff’s opinion is, ask what the suppliers have heard, check with any local contacts you have (including your lawyer and accountant) and try to pick up gossip in the local bar or coffee shop.
While you’re at it, try to find out what the business’ reputation is like. This is easy if you know the area well, but many business people buy companies in different cities or even in different countries. Again, ask around – but also check the internet. Review sites like Yelp are handy, and a simple Google search of “XXX business complaint, problems” can be startlingly revealing!
Next, you need to look at the factors surrounding the business. Is the location suitable? A restaurant or shop can be put at a big advantage by being in the right place for foot traffic.
Check out the competition. Is the market saturated? If there’s a healthy amount of competition, what are they doing differently (the good and the bad)?
After this come the checks that you really need a professional to help you with.
– Are you going to be able to get finance if you need it? If so, are you going to be able to make payments on it?
– Are the premises and the equipment up to code?
– Have there been any recent health violations?
– Are the stock checks up-to-date and legitimate?
– Have all the staff been paid?
– Are the staff’s contracts legal and reasonable?
– Do the finance records for the business check out?
– Are there any debts against the business?
– Are there any legal claims against the business?
– Is the business owner willing to include a clause in the contract that says he can’t open a competing business during X time-frame within Y area?
– Does the seller have a good reputation? Has he ever involved in dodgy activities?
Even if all your due diligence checks out, there will be a certain amount of risk in buying a business – but it will be very much reduced!